5 minute read
Work your money harder
Having a Robust Financial Plan
By Lorna Tan Head of Financial Planning Literacy Consumer Banking Group DBS Bank
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The Covid-19 outbreak which started in Wuhan, China, has brought back unpleasant memories of the SARS outbreak in 2002 and the MERS outbreak in 2012, both of which had resulted in investor stress, anxiety and fear. Most of their concerns centre around whether their investments can withstand the market fluctuations and volatility, and the duration of the uncertainty.
In Singapore and elsewhere, the authorities have put in measures to minimise spread of the outbreak and help stem the global spread of the virus. These include putting in place controls on the entry of visitors from mainland China. For example, all new visitors with recent travel history to mainland China would not be allowed entry into Singapore, or to transit through the country.
As retail investors, we should also have robust measures to safeguard our savings and assets, and that are able to withstand short-term shocks and market gyrations. Doing so will go a long way to prevent any adverse knee jerk reactions and unwise investment decisions. It gives us a peace of mind so we can avoid giving in to unnecessary panic and have sleepless nights.
Here are 7 tips to manage your finances during this period of uncertainty.
1
Sound financial plan
With a proper financial plan in place, we will have a better understanding of our financial resources such as our money flows and where our investments stand in the risk-reward continuum. A comprehensive financial plan covers the areas of managing credit and loans, budgeting, insurance, investment, retirement and estate planning. When these areas are well covered in a sound financial plan, we have greater clarity on how each financial decision affects another and we can adapt more easily to life changes while keeping our life goals intact.
2
Positive cash flow and emergency funds
The foundation to financial wellbeing is to build positive cashflows which can be invested in suitable instruments to make our money work harder. To do this, set up a realistic budget which indicates your money inflows and outflows. Before investing, it is prudent to set aside at least three to six months emergency funds in cash to ensure that you have enough liquidity to tide you and your dependants over during rainy days. Doing so will give you some peace of mind even if you suffer from temporary setbacks like losing a job or are unable to make a living because you must be quarantined. It also means that you can avoid the adverse impact of liquidating your investments for short-term cash. For those in the gig economy, it is advisable to set aside at least 12 months of emergency funds.
3
Insurance cover
Insurance is a means to cushion against financial loss due to specified events. Top on the list is a suitable hospitalisation & surgical insurance plan to cover our hospital bills and selected outpatient visits. Other healthcare-related insurance includes critical illness and income disability cover. There are also insurance plans that help us grow our savings such as endowment plans and investment-linked insurance plans.
4
Work your money harder
Make your money work harder by maximising the interest earned in higher yielding operating accounts like the DBS Multiplier Account which rewards you with up to 3.8% interest per annum for steps taken to boost your financial wellbeing. These include saving, buying an insurance plan, getting a home loan and investing. Each eligible financial transaction helps propel your savings to a higher tier of interest rates. Meanwhile, source for low-cost investment options for your positive cash flows to accumulate over time. For instance, robo-advisory platform DigiPortfolio offers access to diversified investment portfolios at an affordable ongoing fee. Remember that high investment expenses – especially when they are not justified with high returns - will eat into your gains.
5
Diversification
A basic rule for retail investors is not to put all our eggs in one basket. Our investment plan should not be reduced to a single stock or a single investment strategy. It is prudent to diversify our assets and ensure a good mix of investments that carry different levels of risks, depending on your risk profile and financial needs.
Do not over-concentrate on single securities and single-country assets. It is wise to seek the guidance of a professional financial adviser for this process and who can also help to do portfolio rebalancing when required.
Once you have your optimal asset allocation in place, you will be able to sleep peacefully even during times of uncertainty because you know that your risk exposure will be taken care of. A sound and diversified portfolio will be able to weather the ups and downs of market uncertainty.
Time in the market
Time in the market is more important than timing the market as retail investors tend to get out of the market at the wrong time and miss the “good days”. 6
Adopting the strategy of dollar-cost averaging can help you avoid the pitfalls of timing the market. It involves regularly buying a fixed dollar amount of an investment, regardless of the share price. By doing so, you buy more shares when prices are low and few when prices are high. So over time, you will have a lower average share price. This helps investors to stay invested even during tough times since they keep getting a lower average price.
Invest for the long-term
There will always be market uncertainties. However, history tells us that financial markets have bounced back time and time again, so we are on firm ground. We know that that over the long-term, the markets have managed to function efficiently and profitably. So, start investing early and take advantage of the long-time horizon to compound and grow your money. 7
As investors, let us focus on what we can control: setting up a sound financial plan, having a realistic budget, ensuring adequate protection, proper diversification when investing, and a commitment to a long-term strategy to achieve our life goals.
